Market Comment 6th Aug 2012

Global equity markets have been staging a rally that has caught many people by surprise and it’s the US markets that are leading the way.

For some time the FTSE has been attempting to get itself back beyond the resistance level around 5700 to 5715 and on Friday it managed it with ease. Thanks to the much better than expected non farm payroll figure last Friday for once the markets have reacted as they should do following some good economic numbers. For months now the US economy has been wavering and even in this comment we’ve highlighted the possibility that across the pond they are following in the footsteps of Europe and heading for a recession soon, but Friday’s data confirms that they aren’t going down without a fight. The US labour market has been quite resilient in the face of slowing economic activity and on top of this the housing market has also shown signs that it is on the mend. As a result the Dow Jones rallied sharply on Friday, gaining over 211 points to 13,096 including making a huge gap on the open as the move effectively reversed the trend that had been forming earlier in the week trend allowing the bulls to quite literally end on a high.

Investors were also cheered by the news that Angela Merkel’s party in Germany approved the role of the ESM, the eurozone’s permanent bailout fund, albeit in its basic form. This is good news for Mario Draghi’s stimulus measures and is yet another step towards the ESM getting the sort of power such as a banking licence that so many people want to see. But the legal wrangling between reluctant politicians and lawmakers continues and Germany remains steadfastly against the move to give approve a banking licence. This is what the markets are crying out for and pressure is mounting on Germany from all angles including from France and Italy, and so at some point they may have to succumb since this is one of the first major steps that need to be taken in order to assist in driving borrowing costs lower, and ultimately prevent a break up of the eurozone.

Despite the excitement of the big rally on Friday and the addition of more Olympic medals to team GB’s haul the economic outlook doesn’t look any better for the UK. This week sees the BOE’s inflation report which is expected to paint a gloomy picture in terms of growth prospects and we could even see the economy flat line at best through 2012. The rest of the week is very quiet in terms of economic data and there’s nothing for us to get our teeth into today. Volumes could remain thin as the train into work today was emptier than in previous days and track and field events continue.

The US nonfarm payrolls data showed a higher than anticipated increase in jobs number (163,000 versus 101,000) which completely changed the overall sentiment in the global markets. In reaction, investors felt confident to take some risk on again and pushed the euro 203 pips up against the dollar to 1.2386. There was also speculation the German might just give in to bonds buying by the ECB and that added support to the shared currency. This morning a little bit of profit taking is creeping in however taking EUR/USD to 1.2350.

Investors’ appetite for risk was revived by the better than expected US employment report which literally saved the week. Some of that renewed interest was attracted by the precious metals which pushed gold prices $12.3 to $1601.2 on Friday. This move was unusual compared to the past as a good figure would usually bring the sellers of gold out, but not this time. The bigger picture trend still looks to be a sideways move for the precious metal swinging around the $1600.00 mark and today we sit at 1604.

Mirroring other worlds’ markets the energy sector received a big boost of confidence once the US announced a bigger increase in jobs number. As a result, the WTI crude prices jumped nearly 5%, $4.13 to $91.39, as demand for oil was seen to stay strong with more motorists on the roads. A weaker greenback with participants exiting the safe haven currency exacerbated the rise.